Tuesday, February 9, 2010

A problem with unemployment benefits

Many have derided the idea that unemployment benefits discourage people from getting new jobs. Those on the right say that unemploymeny benefits reduce the incentive of the unemployed to find a job; those on the left say that unemployment benefits are so low that nobody would not find a job because of them. As with many cases like this, the answer is probably somewhere in the middle - there are many people who will continue to look for a job (think a responsible worker in a cyclical industry laid off because of headcount), and there are many who won't look for a job (some of the less motivated people out there, and members of the underground economy).
However, the effect in the article above is an interesting one, and one that I hadn't considered. Businesses pay an "unemployment tax" per worker based on the level of unemployment benefits provided by the government. In other words, not only would unemployment benefits have a (heterogeneous) effect on the supply of labor (increasing the supply of it), it would have a much more homogeneous effect on the demand for it (decreasing demand for it - homogeneous because it's based only on the differential elasticity of demand for labor, rather than variations in character type). This goes beyond the "trickle down" effect of higher income taxes on economic growth - it's a direct hiring disincentive.
Of course, this could get adjusted into the wage (obviously a negative if you're trying to stimulate consumption) if wages were flexible, but for companies that hire unionized labor or minimum wage labor or labor under some other sticky constraints (which tends to be a very large component of the labor supply), the provision of unemployment benefits can prolong slumps in employment and growth.

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